Country Report Sri Lanka September 2009

Outlook for 2009-10

• The remaining territory held by the Liberation Tigers of Tamil Eelam (Tamil Tigers) was retaken by the Sri Lankan armed forces in May 2009, spelling the end of the group's insurgency. Security risk will thus diminish sharply in 2010.
• Isolated attacks and ethnic tensions may remain a problem. The government's plans to devolve power to Tamil regions will produce positive results only in the long term, if at all.
• Speculation about an early parliamentary election has risen following the early dissolution of a number of provincial councils. The ruling United People's Freedom Alliance (UPFA) is set to make big electoral gains.
• The Economist Intelligence Unit has revised up its GDP forecast to 3% in 2009 and 6.3% in 2010, from 2.9% in 2009 and 5.9% in 2010 previously. Tourism appears to be recovering more strongly than previously expected.
• Imports will fall in 2009 owing to plunging investment spending, a decline in imports of raw materials for export processing and the lower cost of imported commodities. The current-account deficit will narrow to 4.1% of GDP this year.
• The drop in imports will have a negative effect on fiscal inflows. Given the government's reluctance to rein in spending, this will see the budget deficit widen to 9.7% of GDP in 2009 and narrow only moderately, to 8.4%, in 2010.

Monthly review

• The UPFA won a resounding victory in the provincial elections in Uva in August. Its performance in urban council elections in the north was more mixed: it won control of Jaffna, but performed poorly in Vavuniya.
• Kumaran Padmanadan, a senior Tamil Tiger figure who had been trying to rebuild the group under his leadership, has been arrested and is now in the custody of the Sri Lankan authorities.
• The Central Bank of Sri Lanka issued US$190m in Sri Lanka Development Bonds in August. It has also reportedly sold US$875m-worth of Sri Lanka rupee-denominated two- and four-year government debt to foreign investors.
• China's state-owned Exim Bank is set to provide funding for the Colombo-Katunayake airport expressway, as well as for the construction of a fuel bunkering facility at Hambantota port in the south.
• Tourist arrivals were up by 8.1% year on year in June and by 28% in July following the ending of the civil war, but were still down by 10% year on year in January-July.
• Exports were down by 18% year on year in January-July, to US$3.2bn, while imports dropped even more sharply, by 36.7%, to US$4.4bn.

This report covers the following industry codes:
SIC Code: 49;70;15
NAICS Code: 22;72;23